Fonterra lifts forecast payout to record high NZ$8.30/kg; payout forecast lifted NZ$1.30/kg in 2 mths; economic boost over NZ$2 bln

By Bernard Hickey

Fonterra has increased its forecast payout for the current 2013/14 season by a further 50c/kg to a record high NZ$8.30/kg as it experiences strong demand for milk powder from China, despite its recent botulism scare.

This is Fonterra's third payout forecast increase in less than two months and takes the increase to NZ$1.30/kg since late July.

Combined with an expected 5% increase in production after last year's drought, the higher payout is expected to boost annual farmer incomes by more than NZ$4 billion from a year ago to almost NZ$13.3 billion.

However, Fonterra also warned the high milk price would hurt profits for shareholders, although it pledged to keep its forecast dividend of 32c/share by drawing on its cash flows and strong balance sheet.

The total payout for fully 'shared-up' farmers would therefore be NZ$8.62/kg, which would surpass the payout of NZ$7.90/kg (NZ$7.59/kg milk payout and 31c of dividends) in 2007/08, although 24c of that was then retained by the cooperative to bolster its capital stocks as it grappled with high debt loads during the Global Financial Crisis. The total payout in 2010/11 was NZ$7.90/kg, including NZ$7.60/kg as the milk payout and 30c/share of dividends. (Corrects to make clear the previous record high total payout was 2010/11 not 2007/08)

Fonterra increased its payout forecast by 30c/kg on August 27 and by 50c/kg on July 31. The payout forecast increases and strong demand from China for milk powder are in stark contrast to the botulism scare happening at the same time. It forecast the final payout for the just completed 2012/13 year in May at NZ$6.12/kg, including a 32c/share dividend. 

“The record Forecast Farmgate Milk Price reflected continuing strong international prices for dairy, particularly Whole Milk Powder driven by robust demand from Asia, especially China. We are still facing high levels of volatility around the world,” said Fonterra Chairman John Wilson.

Chief Executive Theo Spierings said the business, however, also faced headwinds, especially in the first half of the current financial year. He said Fonterra expected earnings would be significantly lower than the strong performance in the first half of 2013.

“The higher cost of goods will make it more difficult to drive earnings growth in our consumer and foodservice businesses in the first half of this financial year. We also expect to see a negative impact on our product mix returns during the first half of the current year as milk powder prices significantly outpace the relative prices of cheese and casein," Speirings said.

“Prospects for the second half look more positive for our consumer businesses, but remain uncertain for NZ Milk Products," he said.

“Our estimated dividend of 32 cents per share for 2014 currently remains unchanged. Fonterra can draw upon its balance sheet and cash flow performance to support the estimated dividend."

Spierings said it was difficult to predict when the extreme price volatility between products would reverse, "but expectations are that the impact is likely to be short-term."

Reaction

The New Zealand dollar rose around 20 basis points to 83.35 USc in afternoon trade after the announcement.

Westpac Chief Economist Dominick Stephens said Fonterra's milk price forecast still assumed a 10% fall in GlobalDairyTrade auction prices between now and June 2014.

"Should GlobalDairyTrade prices continue to defy gravity, the milk price forecast could be revised higher still," Stephens said.

"Our forecast further assumes that the New Zealand dollar will remain around 83 cents against the US dollar," he said.

(Updated with chart, corrects previous record to 2010/11 from 2007/08, details expected NZ$4 billion lift in receipts this year)